In a downbeat assessment of the UK property market, S&P stressed that house prices remained overvalued and many families were vulnerable to George Osborne's budgetary squeeze.

The Treasury has acknowledged that attempts to reduce Britain's deficit during this parliament will cost hundreds of thousands of jobs in the public sector, with knock-on effects in the private sector as well.

"We expect house price movements to remain uncertain in the near term, and we note that a high percentage of non-conforming borrowers remain in severe arrears. Therefore, possible future increases in unemployment or interest rates may cause a further wave of repossessions," said S&P credit analyst Neil Monro.

The ratings agency added: "The looming fiscal austerity package and the possibility of interest rates rising again could significantly test some borrowers' ability to make their mortgage payments, in our opinion.

"This is particularly true in the context of still severely curtailed refinancing options, due to lender-initiated tightening of their criteria, as well as potential future changes to regulation resulting from the Financial Services Authority's Mortgage Market Review."

S&P said fiscal tightening could lead to a second wave of deterioration in UK prime and non-conforming residential mortgage-backed security (RMBS) collateral performance and it remained cautious about the longevity of the bounce-back in UK house prices.

"In our view, UK housing remains overvalued on a fundamental basis," it said. "For example, the average house-price-to-income affordability ratio for first-time buyers is still stretched at 4.3 times, relative to the long-term average of 3.3 times."